Cost of Living: Definition, How to Calculate, Index, and Example

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Caroline Banton
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Caroline Banton has 6+ years of experience as a freelance writer of business and finance articles. She also writes biographies for Story Terrace.
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Updated October 10, 2024
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Cost of Living

Investopedia / Laura Porter

What Is the Cost of Living?

The cost of living refers to the money needed for essentials like housing, food, taxes, and healthcare in a specific location and time. It is often used to compare the expenses of living in different cities. Higher living costs, like in New York, require higher salaries for affordability.

Key Takeaways

  • Cost of living is the amount of money needed to sustain a certain standard of living by affording expenses such as housing, food, taxes, and healthcare.
  • Salaries should reflect the higher cost of living in more expensive cities like New York City.
  • The cost of living index compares the cost of living in a major city to a corresponding metropolitan area.

How the Cost of Living Is Used

The cost of living can be a significant factor in personal wealth accumulation because a salary can provide a higher standard of living in a city where daily expenses such as rent, food, and entertainment are less.

In contrast, a high salary can seem insufficient in an expensive city such as New York. Changes in the CPI are often a triggering event in labor and other contracts with escalation clauses. The contract will detail exactly how any periodic adjustments happen and what parts of the contract will change.

In a 2024 survey, Mercer, a global human resources firm, finds the cities with the highest cost of living in order are Hong Kong, Singapore, Zurich, Geneva, and Basel. New York City ranked as the costliest city in the United States followed by Los Angeles, Honolulu, and San Francisco.

The Cost of Living Index

The cost of living index compares the cost of living in a major city to a corresponding metropolitan area. The index incorporates various living expenses creating an aggregate measure that workforce entrants can use as a benchmark.

As college graduates weigh employment alternatives and currently employed job seekers consider relocation, the index provides an informative snapshot of rental, transportation, and grocery costs.

Mercer's cost of living index measures prices in 226 urban areas for a basket of goods, which includes 12 large eggs, one liter of olive oil, espresso coffee at a popular cafe, one liter of gasoline (unleaded 95), men's blue jeans, and women's shampoo, haircut, and styling.

The Economic Policy Institute updated its Family Budget Calculator in January 2024 with data from 2023. The calculator helps families determine how much salary they will need to cover the cost of living in 3,143 counties in all 613 metro areas.

Three out of five of the world’s most expensive cities are in Switzerland.

Most Expensive Urban Areas in the U.S.

According to The Council for Community and Economic Research, the 10 most expensive urban areas in the U.S. in 2023 were:

  1. New York (Manhattan)
  2. Honolulu
  3. San Jose, California
  4. San Francisco
  5. New York (Brooklyn)
  6. Orange County, California
  7. Los Angeles (Long Beach)
  8. Washington D.C.
  9. Boston
  10. Seattle

Least Expensive Urban Areas in the U.S.

According to The Council for Community and Economic Research, the 10 least expensive urban areas in the U.S. in 2023 were:

  1. Decatur, Illinois
  2. Harlingen, Texas
  3. McAllen, Texas
  4. Tupelo, Mississippi
  5. Ponca City, Oklahoma
  6. Muskogee, Oklahoma
  7. Conway, Arkansas
  8. Florence, Alabama
  9. Kalamazoo, Michigan
  10. Lawton, Oklahoma

U.S. States Ranked by Cost of Living

The following is a list of U.S. states, districts, and territories ranked by cost of living from lowest to highest as of the second quarter of 2024:

  1. West Virginia
  2. Oklahoma
  3. Kansas
  4. Alabama
  5. Mississippi
  6. Arkansas
  7. Missouri
  8. Iowa
  9. Indiana
  10. Tennessee
  11. Michigan
  12. Georgia
  13. South Dakota
  14. North Dakota
  15. Louisiana
  16. Texas
  17. Wyoming
  18. Kentucky
  19. New Mexico
  20. Wisconsin
  21. Nebraska
  22. Ohio
  23. Montana
  24. Illinois
  25. Pennsylvania
  26. Minnesota
  27. South Carolina
  28. North Carolina
  29. Delaware
  30. Virginia
  31. Colorado
  32. Puerto Rico
  33. Florida
  34. Nevada
  35. Idaho
  36. Utah
  37. Rhode Island
  38. Connecticut
  39. Maine
  40. Arizona
  41. Oregon
  42. New Hampshire
  43. Vermont
  44. Maryland
  45. New Jersey
  46. Washington
  47. Alaska
  48. New York
  49. Massachusetts
  50. District of Columbia
  51. California
  52. Hawaii

Cost of Living and Wages

The rising cost of living has spurred debate over the U.S. federal minimum wage and the disparity between the lowest salary allowed by law and the earnings needed to maintain an adequate cost of living.

Proponents of a hike in wages cite increased worker productivity levels since 1968 as inequitably correlated to the minimum hourly rate of pay. As pay levels once tracked the increase in productivity, the divergence between earnings and worker efficiency has reached historically disproportionate levels.

By contrast, opponents of a minimum wage contend that a raise could spur higher consumer prices as employers offset rising labor costs.

Multinational corporations use the cost of living to assess expatriate salary packages for international assignees.

Wage Increases and Cost-of-Living Adjustments (COLAs)

In 1973, Congress enacted legislation to address cost-of-living adjustments (COLAs). COLA adjustments for Social Security and Supplemental Security Income (SSI) benefits were instituted so that the payments keep pace with inflation.

For example, in December 2022, the COLA was 8.7% due to the high levels of inflation as a result of the COVID-19 pandemic, and the increased amounts were paid starting in January 2023. Federal SSI payment levels increased by the same percentage.

The Social Security Act requires COLAs to be based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The Social Security Administration states that:

A COLA effective for December of the current year is equal to the percentage increase (if any) in the CPI-W from the average for the third quarter of the current year to the average for the third quarter of the last year in which a COLA became effective.

The Social Security Administration (SSA) announced a COLA increase of 2.5% for 2025. That's lower than what was announced for 2024, which was 3.2%. The agency noted that the average increase over the last 10-year period was 2.6%.

Which U.S. State Has the Highest Cost of Living?

Hawaii has the highest cost of living as of Q2 2024. It has a cost of living index of 188.4. That can be compared to the state with the lowest cost of living, which is West Virginia, with a cost of living index of 84.3.

What Is the Most Expensive City in the U.S.?

The most expensive city in the U.S. is New York City as determined by various cost of living indexes.

Is Living in the U.S. Expensive?

Living in the U.S. is considered to be generally expensive. Many cities in the U.S. rank high in cost of living indexes, indicating a high living cost. Additionally, expenses for healthcare and college, for example, are relatively high when compared to other countries. As the U.S. is a large country, living costs vary greatly depending on location.

The Bottom Line

The cost of living refers to the expenses required to sustain a particular standard of living, including housing, food, taxes, and healthcare. It serves as a benchmark for comparing expenses across different areas and informs decisions about salaries and relocations.

A cost of living index aggregates these expenses, offering a detailed measure that helps individuals understand the financial requirements of different locations.

Rising living costs have ignited debates about wage increases and the need for cost-of-living adjustments. These measures seek to ensure that earnings are in step with inflation so that purchasing power is not reduced and economic stability is maintained.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

  1. Mercer. "Cost of Living City Ranking 2024.”

  2. Economic Policy Institute. "The Economic Policy Institute's Family Budget Calculator."

  3. The Council for Community and Economic Research. "2023 Annual Average Cost of Living Index Released."

  4. Missouri Economic Research and Information Center. "Cost of Living Data Series."

  5. Economic Policy Institute. “Raising the Federal Minimum Wage to $15 by 2025 Would Lift the Pay of 32 Million Workers.”

  6. U.S. Congress. “H.R.11333 – an Act to Provide a 7-percent Increase in Social Security Benefits Beginning With March 1974 and an Additional 4-Percent Increase Beginning With June 1974, to Provide Increases in Supplemental Security Income Benefits, and for Other Purposes.”

  7. Social Security Administration. “SSI Federal Payment Amounts for 2024.”

  8. Social Security Administration. “2023 Social Security Changes,” Page 1.

  9. Social Security Administration. “Computation of the Social Security Laws.”

  10. Social Security Administration. "Social Security Announces 2.5 Percent Benefit Increase for 2025."

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